Hedge funds trail S&P 500 by 10 percentage points, Goldman says

Hedge funds’ returns have stayed “lackluster” this year, with the $2.3 trillion industry trailing the gains of the Standard & Poor’s 500 Index by about 10 percentage points, according to Goldman Sachs Group Inc.

Hedge funds gained 5.4% on average through May 10, compared with a 15.4% rise for the S&P 500 and a 14.8% increase for the typical mutual fund, a team of Goldman Sachs analysts led by Amanda Sneider and David Kostin wrote in a report released today.

Hedge-fund managers have been hurt in 2013 by their bearish wagers on stocks, with “popular” shorts such as Johnson & Johnson and Gilead Sciences Inc. rising more than the broader equity market, Goldman Sachs said. Fewer than 5% of the hedge funds tracked by New York-based Goldman Sachs are beating the S&P 500 or a typical mutual fund that buys stocks of the biggest U.S. companies.

A “multi-year trend of lackluster hedge-fund returns continues in 2013,” the analysts wrote. “Strong long performance was not enough to outweigh the drag from popular short positions.”

Hedge funds, which typically charge clients a 2% management fee and 20% of any investment gains, are private pools of capital that can bet on both rising and falling asset prices. From the start of 2009 to the end of April this year, the average fund has risen 21% after fees, compared with a 77% gain for the U.S. benchmark S&P 500, data compiled by Bloomberg shows.

Hedge funds are currently 53% “net long,” the highest percentage since the first quarter of 2007, according to Goldman Sachs. The figure is derived by subtracting bets that stocks will fall from wagers that they will rise.

The stocks hedge funds are most bullish on include American International Group Inc., Google Inc., Apple Inc. and Citigroup Inc., according to Goldman, which analyzed equities that appear most frequently among the top 10 holdings of fund managers.

Stocks hedge funds are most commonly shorting include Johnson & Johnson, Intel Corp., International Business Machines Corp. and Gilead, the Goldman Sachs analysts said. In a short sale, traders borrow shares from a broker and sell them, hoping to buy back the stock at a lower price. They then return the borrowed shares to their broker and pocket the difference.